**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

XQUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**For the Quarterly Period Ended September 30, 2008**

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934         

**For the Transition Period from _________to_______**

Commission File Number:     000-53249

**AB&T FINANCIAL CORPORATION**

(Exact name of small business issuer as specified in its charter)

| North Carolina                    | 84-1653729           |
|-----------------------------------|----------------------|
| (State or other jurisdiction      | (I.R.S. Employer     |
| of incorporation or organization) | Identification No. ) |

**292 W. Main Avenue        Gastonia, North Carolina 28052**(Address of principal executive offices and zip code)

**(704) 867-5828**

(Issuer's telephone number, including area code)         

**NA**

(Former address of principal executive offices)        ________________________________________________

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of

1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90        days.        ** ****YESX   NO__**

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

**Large accelerated filer___          Accelerated filer___     **

**Non-accelerated filer____ (Do not check if a smaler reporting company)    Smaller reporting company X_**

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)**YES   NOX**

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.         

**2,678,205 shares of common stock, $1.00 par value, as of November 12, 2008**

----

**AB&T FINANCIAL CORPORATION**

**INDEX**

| **PART I – FINANCIAL INFORMATION**                                                                                                                                   | **Page No.** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                                                                                       |         |
| Item 1.          Financial Statements (Unaudited)                                                                        |         |
|                                                                                                                                                                       |         |
|           Consolidated Balance Sheets – September 30, 2008 and December 31, 2007                                   | 3            |
|                                                                                                                                                                       |         |
|           Consolidated Statements of Operations – Nine months ended September 30, 2008 and 2007                    |         |
|                     and three months ended September 30, 2008 and 2007 | 4            |
|                                                                                                                                                                       |         |
|           Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) -                        |         |
|                     nine months ended September 30, 2008 and 2007      | 5            |
|                                                                                                                                                                       |         |
|           Consolidated Statements of Cash Flows – Nine months ended September 30, 2008 and 2007                    | 6            |
|                                                                                                                                                                       |         |
| Notes to Consolidated Financial Statements                                                                                                                                 | 7-12         |
|                                                                                                                                                                       |         |
| Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations             | 13-18        |
|                                                                                                                                                                       |         |
| Item 4T.     Controls and Procedures                                                                                                              | 19           |
|                                                                                                                                                                       |         |
| **PART II – OTHER INFORMATION**                                                                                                                                      |         |
|                                                                                                                                                                       |         |
| Item 6.      Exhibits                                                                                                                             | 21           |

 

    

     

----

**PART I - FINANCIAL INFORMATION** 

**Item 1 - Financial Statements**

**AB&T FINANCIAL CORPORATION**

 

**Consolidated Balance Sheets         **

|                                                                                                                                                                                                                                                                                                                                          |  | **September 30,                    2008**             |                                                   | **December 31,                    2007**              |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                          |  | **(Unaudited)**                                       |                                                   | **(Audited)**                                         |        |
| Assets                                                                                                                                                                                                                                                                                                                                        |  |                                                  |                                                   |                                                  |        |
|      Cash and cash equivalents:                                                                                                                                                                                                                                                                                      |  |                                                  |                                                   |                                                  |        |
|           Cash and due from banks                                                                                                                                                                                                                                                           |  | $        3,398,115 |                                                   | $        4,233,921 |        |
|           Federal funds sold                                                                                                                                                                                                                                                                |  | 16,891,359                                            |                                                   | 14,226,695                                            |        |
|                Total cash and cash equivalents                                                                                                                                                                                                                     |  | 20,289,474                                            |                                                   | 18,460,616                                            |        |
|      Securities available for sale at fair value                                                                                                                                                                                                                                                                     |  | 3,656,759                                             |                                                   | 3,975,007                                             |        |
|      Nonmarketable equity securities                                                                                                                                                                                                                                                                                 |  | 1,371,280                                             |                                                   | 832,180                                               |        |
|                Total investments                                                                                                                                                                                                                                   |  |                                                       | 5,028,039                                         |                                                       |        | 4,807,187 |  |
|      Loans receivable                                                                                                                                                                                                                                                                                                |  |                                                       | 142,193,513                                       |                                                       |        | 119,523,426 |  |
|      Less allowance for loan losses                                                                                                                                                                                                                                                                                  |  |                                                  | (1,646,506                                        | )                                                     |   | (1,370,235 | ) |
|                Loans, net                                                                                                                                                                                                                                          |  |                                                  | 140,547,007                                       |                                                       |   | 118,153,191 |  |
|      Premises, furniture and equipment, net                                                                                                                                                                                                                                                                          |  |                                                       | 4,144,271                                         |                                                       |        | 3,715,291 |  |
|      Accrued interest receivable                                                                                                                                                                                                                                                                                     |  |                                                       | 678,922                                           |                                                       |        | 724,562 |  |
|      Other real estate owned                                                                                                                                                                                                                                                                                         |  |                                                       | 2,538,508                                         |                                                       |        | 820,845 |  |
|      Deferred tax asset                                                                                                                                                                                                                                                                                              |  |                                                       | 567,137                                           |                                                       |        | 434,457 |  |
|      Other assets                                                                                                                                                                                                                                                                                                    |  |                                                  | 261,465                                           |                                                       |   | 99,356 |  |
|                Total assets                                                                                                                                                                                                                                        |  | **$**                                                 | **     ****174,054,823** |                                                       | **$**  | **     ****147,215,505** |  |
| Liabilities                                                                                                                                                                                                                                                                                                                                   |  |                                                       |                                              |                                                       |        |   |  |
|      Deposits                                                                                                                                                                                                                                                                                                        |  |                                                       |                                              |                                                       |        |   |  |
|           Noninterest-bearing transaction accounts                                                                                                                                                                                                                                          |  | $                                                     |      6,326,934           |                                                       | $      |      3,312,975 |  |
|           Interest-bearing transaction accounts                                                                                                                                                                                                                                             |  |                                                       | 3,937,059                                         |                                                       |        | 3,308,771 |  |
|           Savings and money market                                                                                                                                                                                                                                                          |  |                                                       | 24,588,781                                        |                                                       |        | 36,060,632 |  |
|           Time deposits $100,000 and over                                                                                                                                                                                                                                                   |  |                                                       | 73,278,588                                        |                                                       |        | 47,892,949 |  |
|           Other time deposits                                                                                                                                                                                                                                                               |  |                                                  | 10,874,044                                        |                                                       |   | 13,210,156 |  |
|                Total deposits                                                                                                                                                                                                                                      |  |                                                  | 119,005,406                                       |                                                       |   | 103,785,483 |  |
|      Borrowed funds                                                                                                                                                                                                                                                                                                  |  |                                                       | 6,519,778                                         |                                                       |        | 5,610,411 |  |
|      FHLB advances                                                                                                                                                                                                                                                                                                   |  |                                                       | 23,570,000                                        |                                                       |        | 13,000,000 |  |
|      Accrued interest payable                                                                                                                                                                                                                                                                                        |  |                                                       | 165,107                                           |                                                       |        | 80,775 |  |
|      Other liabilities                                                                                                                                                                                                                                                                                               |  |                                                  | 74,599                                            |                                                       |   | 265,114 |  |
|                Total liabilities                                                                                                                                                                                                                                   |  |                                                  | 149,334,890                                       |                                                       |   | 122,741,783 |  |
|                                                                                                                                                                                                                                                                                                                                          |  |                                                       |                                              |                                                       |        |   |  |
| Shareholders’ equity                                                                                                                                                                                                                                                                                                                    |  |                                                       |                                              |                                                       |        |   |  |
|      Preferred stock, 1,000,000 shares authorized, none issued                                                                                                                                                                                                                                                       |  |                                                       | -                                                 |                                                  |   | - |  |
|      Common stock, $5.00 par value; 10,000,000 shares                              authorized, issued and outstanding – 2,678,205 at                              September 30, 2008 and December 31, 2007 |  |                                                       | 13,391,025                                        |                                                       |        | 13,391,025 |  |
|      Capital surplus                                                                                                                                                                                                                                                                                                 |  |                                                       | 10,818,344                                        |                                                       |        | 10,712,540 |  |
|      Retained earnings                                                                                                                                                                                                                                                                                               |  |                                                       | 481,911                                           |                                                       |        | 356,373 |  |
|      Accumulated other comprehensive income                                                                                                                                                                                                                                                                          |  |                                                       | 28,653                                            |                                                       |        | 13,784 |  |
|           Total shareholders’ equity                                                                                                                                                                                                                                                  |  |                                                  | 24,719,933                                        |                                                       |   | 24,473,722 |  |
|           Total liabilities and shareholders’ equity                                                                                                                                                                                                                                  |  | **$**                                                 | **     ****174,054,823** |                                                       | **$**  | **     ****147,215,505** |  |

*See notes to consolidated financial statements*

----

**AB&T FINANCIAL CORPORATION**

**Consolidated Statements of Operations**

**(Unaudited)         **

|                                                                                                                             | **For the three months ended****September****30,**      |   | **For the n****ine****months ended**

**September****30,**        |
|----------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|--------|-------------------------------------------------------------------|
|                                                                                                                             | **2008**                                                |   | **2007**                                                          |   | **2008** |   | **2007** |
| **Interest income:**                                                                                                             |                                                    |   |                                                              |   |   |   |   |
|      Loans, including fees                                                                              | $  2,134,935                                       |   | $ 2,382,675                                                  |   | $  6,438,592 |   | $  6,596,889 |
|      Investment securities, taxable                                                                     | 48,953                                                  |   | 30,774                                                            |   | 152,882 |   | 84,471 |
|      FHLB interest and dividends                                                                        | 19,105                                                  |   | 3,113                                                             |   | 49,273 |   | 8,545 |
|      Federal funds sold                                                                                 | 42,780                                                  |   | 88,650                                                            |   | 175,328 |   | 235,269 |
|      Time deposits with other banks                                                                     | 21,778                                                  |   | 65,305                                                            |   | 57,969 |   | 264,970 |
|           Total                                                                | 2,267,551                                               |   | 2,570,517                                                         |   | 6,874,044 |   | 7,190,144 |
| **Interest expense:**                                                                                                            |                                                    |   |                                                              |   |   |   |   |
|      Time deposits $100,000 and over                                                                    | 606,891                                                 |   | 611,715                                                           |   | 1,855,106 |   | 1,731,678 |
|      Other deposits                                                                                     | 254,408                                                 |   | 620,006                                                           |   | 992,666 |   | 1,807,685 |
|      Other interest expense                                                                             | 214,962                                                 |   | 35,498                                                            |   | 550,999 |   | 39,263 |
|           

           Total | 1,076,261                                               |   | 1,267,219                                                         |   | 3,398,771 |   | 3,578,626 |
| **Net interest income**                                                                                                          | 1,191,290                                               |   | 1,303,298                                                         |   | 3,475,273 |   | 3,611,518 |
|      Provision for loan losses                                                                          | 330,629                                                 |   | 204,201                                                           |   | 652,870 |   | 420,690 |
| **Net interest income after provision for loan losses**                                                                          | 860,661                                                 |   | 1,099,097                                                         |   | 2,822,403 |   | 3,190,828 |
| **Other operating income:**                                                                                                      |                                                    |   |                                                              |   |   |   |   |
|      Service charges on deposit accounts                                                                | 66,422                                                  |   | 37,260                                                            |   | 183,029 |   | 103,572 |
|      Residential mortgage application fees                                                              | -                                                       |   | 798                                                               |   | 3,395 |   | 4,739 |
|      Rental income                                                                                      | -                                                       |   | -                                                                 |   | 2,400 |   | 20,000 |
|      Gain (loss) on sale of other real estate                                                           | (61,984)                                                |   | -                                                                 |   | (94,968) |   | 40,242 |
|      Other service charges, commission and fees                                                         | 17,339                                                  |   | 4,737                                                             |   | 65,116 |   | 28,189 |
|           Total                                                                | 21,777                                                  |   | 42,795                                                            |   | 158,972 |   | 196,742 |
| **Other operating expenses:**                                                                                                    |                                                    |   |                                                              |   |   |   |   |
|      Salaries and employee benefits                                                                     | 556,980                                                 |   | 479,785                                                           |   | 1,652,904 |   | 1,438,066 |
|      Occupancy expense                                                                                  | 55,662                                                  |   | 45,261                                                            |   | 141,576 |   | 120,438 |
|      Furniture and equipment expense                                                                    | 52,083                                                  |   | 38,169                                                            |   | 155,533 |   | 105,101 |
|      Other operating expenses                                                                           | 315,147                                                 |   | 226,730                                                           |   | 821,454 |   | 647,329 |
|           Total                                                                | 979,872                                                 |   | 789,945                                                           |   | 2,771,467 |   | 2,310,934 |
| **Income****(loss)****before income taxes**                                                                                      | (97,434)                                                |   | 351,947                                                           |   | 209,908 |   | 1,076,636 |
| Income tax expense(benefit)                                                                                                      | (36,401)                                                |   | 138,170                                                           |   | 84,370 |   | 423,122 |
| **Net income****(loss)**                                                                                                         | $     (61,033)                 |   | $     213,777                            |   | $     125,538 |   | $     653,514 |
| **Income****(loss)****per share**                                                                                                |                                                    |   |                                                              |   |   |   |   |
| Basic income(loss)per share                                                                                                      | $        (0.02) |   | $          0.08 |   | $          0.05 |   | $          0.26 |
| Diluted income(loss)per share                                                                                                    | $        (0.02) |   | $          0.08 |   | $           0.05 |   | $          0.26 |

*See notes to consolidated financial statements*

----

**AB&T FINANCIAL CORPORATION**

**Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)        For the nine months ended September 30, 2008 and 2007        (Unaudited)**

|                                                                                           |  | **Common Stock** |           |       |        | **Accumulated                    Other                    Comprehen-sive** |  | **Retained**      |            |                                      |        |
|------------------------------------------------------------------------------------------------|--|------------------|-----------|------------|--------|----------------------------------------------------------------------------|--|-------------------|------------|-------------------------------------------|--------|
|                                                                                           |  | **Shares**       |           | **Amount** |        | **Capital                    Surplus**                                     |  | **Income (Loss)** |            | **Earnings                    (Deficit)** |        | **Total** |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Balance,                    December 31, 2006                                                  |  |                  | 1,339,105 |            | $      | 6,695,425                                                                  |  | $                 | 5,017,865  |                                           | $      |      (14,688) |  | $ | (472,890) |  | $ | 11,225,712 |  |
| Net income                                                                                     |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  | 653,514 |  |  | 653,514 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Other comprehensive     loss, net     of tax |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        | 19,137 |  |  |   |  |   | 19,137 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Comprehensive      income                                             |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |   | 672,651 |  |
| Stock-based      employee      compensation  |  |                  |      |            |        |                                                                       |  |                   | 92,980     |                                           |        |   |  |  |   |  |  | 92,980 |  |
| Proceeds from                    stock offering                                                |  |                  | 1,339,100 |            |        | 6,695,600                                                                  |  |                   | 6,494,635  |                                           |        |   |  |  |   |  |  | 13,190,235 |  |
| Costs associated with                                                                          |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| stock offering                                                                                 |  |                  |      |            |        |                                                                       |  |              | (928,208   | )                                         |        |   |  |  |   |  |   | (928,208 | ) |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Balance                                                                                        |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| September 30, 2007                                                                             |  |             | 2,678,205 |            | $      | 13,391,025                                                                 |  | $                 | 10,677,272 |                                           | $      | 4,449 |  | $ | 180,624 |  | $ | 24,253,370 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Balance,                    December 31, 2007                                                  |  |                  | 2,678,205 |            | $      | 13,391,025                                                                 |  | $                 | 10,712,540 |                                           | $      | 13,784 |  | $ | 356,373 |  | $ | 24,473,722 |  |
| Net income                                                                                     |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  | 125,538 |  |  | 125,538 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Other comprehensive     loss, net of tax                              |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        | 14,869 |  |  |   |  |   | 14,869 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| Comprehensive      income                                             |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |   | 140,407 |  |
| Stock-based      employee                                             |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
|      compensation                                                     |  |             |      |            |   |                                                                       |  |              | 105,804    |                                           |   |   |  |   |   |  |   | 105,804 |  |
| Balance                                                                                        |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |
| September 30, 2008                                                                             |  |             | 2,678,205 |            | $      | 13,391,025                                                                 |  | $                 | 10,818,344 |                                           | $      | 28,653 |  | $ | 481,911 |  | $ | 24,719,933 |  |
|                                                                                           |  |                  |      |            |        |                                                                       |  |                   |       |                                           |        |   |  |  |   |  |  |   |  |

*See notes to consolidated financial statements*

----

**AB&T FINANCIAL CORPORATION**

**Consolidated Statements of Cash Flows        For the nine months ended September 30, 2008 and 2007**

**(Unaudited)**

|                                                                                                                                                                                        |  | **For the nine months                    ended September 30,** |                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------------------------------------------------------|-----------------------------------------|
|                                                                                                                                                                                   |  | **2008**                                                       |                                         |  | **2007** |  |
| **Cash flows from operating activities:**                                                                                                                                              |  |                                                                |                                    |  |  |  |   |  |
|      Netincome                                                                                                                                                |  | $                                                              |      125,538   |  |  | $ | 653,514 |  |
|      Adjustments to reconcile net income to net                          cash provided by operating activities                       |  |                                                                |                                    |  |  |  |   |  |
|           Provision for loan losses                                                                                                  |  |                                                                | 652,870                                 |  |  |  | 420,690 |  |
|           Depreciation and amortization expense                                                                                      |  |                                                                | 138,206                                 |  |  |  | 106,284 |  |
|           Discount accretion and premium amortization                                                                                |  |                                                                | (1,864                                  | ) |  |  | 68,463 |  |
|           Deferred income tax benefit (expense)                                                                                      |  |                                                                | (132,681                                | ) |  |  | 95,342 |  |
|           Decrease (increase) in interest receivable                                                                                 |  |                                                                | 45,640                                  |  |  |  | (107,149 | ) |
|           Increase in interest payable                                                                                               |  |                                                                | 84,332                                  |  |  |  | 105,367 |  |
|           Increase in other assets                                                                                                   |  |                                                                | (162,109                                | ) |  |  | (36,876 | ) |
|           Decrease in other liabilities                                                                                              |  |                                                                | (200,002                                | ) |  |  | (105,753 | ) |
|           Loss on sale of other real estate                                                                                          |  |                                                                | 94,968                                  |  |  |  | - |  |
|       Stock based compensation expense                                                                                                                        |  |                                                                | 105,804                                 |  |  |  | 92,980 |  |
|                Net cash provided by operating activities                                                    |  |                                                           | 750,702                                 |  |  |   | 1,292,862 |  |
|                                                                                                                                                                                   |  |                                                                |                                    |  |  |  |   |  |
| **Cash flows from investing activities:**                                                                                                                                              |  |                                                                |                                    |  |  |  |   |  |
|      Purchase of securities available for sale                                                                                                                |  |                                                                | -                                       |  |  |  | (1,472,021 | ) |
|      Purchase of nonmarketable equity securities                                                                                                              |  |                                                                | (809,100                                | ) |  |  | (417,000 | ) |
|      Sales of nonmarketable equity securities                                                                                                                 |  |                                                                | 270,000                                 |  |  |  | - |  |
|      Calls and maturities of securities available for sale                                                                                                    |  |                                                                | 344,468                                 |  |  |  | 1,354,612 |  |
|      Net increase in loans receivable                                                                                                                         |  |                                                                | (25,153,012                             | ) |  |  | (20,389,451 | ) |
|      Proceeds from sale of other real estate                                                                                                                  |  |                                                                | 293,695                                 |  |  |  | - |  |
|      Purchases of premises, furniture, and equipment                                                                                                          |  |                                                           | (567,186                                | ) |  |   | (930,734 | ) |
|                Net cash used by investing activities                                                        |  |                                                           | (25,621,135                             | ) |  |   | (21,854,594 | ) |
|                                                                                                                                                                                   |  |                                                                |                                    |  |  |  |   |  |
| **Cash flows from financing activities:**                                                                                                                                              |  |                                                                |                                    |  |  |  |   |  |
|      Net (decrease) increase in demand deposits, interest-bearing                          transaction accounts and savings accounts |  |                                                                | (7,829,604                              | ) |  |  | 2,614,435 |  |
|      Net increase in certificates of deposit and                              other time deposits           |  |                                                                | 23,049,528                              |  |  |  | 7,942,783 |  |
|      Net (decrease) increase in borrowed funds                                                                                                                |  |                                                                | 909,367                                 |  |  |  | 8,581,283 |  |
|      Net increase in advances from FHLB                                                                                                                       |  |                                                                | 10,570,000                              |  |  |  | - |  |
|      Proceeds from issuance of common stock, net                                                                                                              |  |                                                                | -                                       |  |  |  | 12,262,027 |  |
|                Net cash provided by financing activities                                                    |  |                                                           | 26,699,291                              |  |  |   | 31,400,528 |  |
|                                                                                                                                                                                   |  |                                                                |                                    |  |  |  |   |  |
| **Net increase in cash and cash equivalents**                                                                                                                                          |  | $                                                              |      1,828,858 |  |  | $ | 10,838,796 |  |
| **Cash and cash equivalents, beginning****of period**                                                                                                                                  |  | $                                                              | 18,460,616                              |  |  | $ | 14,464,533 |  |
| **Cash and cash equivalents, end****of period**                                                                                                                                        |  | **$**                                                          | **20,289,474**                          |  |  | **$** | **25,303,329** |  |

*See notes to consolidated financial statements*

 

**AB&T FINANCIAL CORPORATION**

**Notes to Con****solidated****Financial Statements**

**(Unaudited)**

**Note 1 - Basis of Presentation**

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are consolidated to omit disclosures, which would substantially duplicate those contained in Alliance Bank & Trust’s 2007 Annual Report on Form 10-KSB. The financial statements as        ofSeptember30, 2008 and for the interim periods endedSeptember30, 2008 and 2007 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The financial information as of        December 31, 2007 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in Alliance Bank & Trust’s2007 Annual Report on Form 10-KSB filed with the Federal Deposit Insurance Corporation.

**Note 2****–****Organization**         

Alliance Bank & Trust Company (the Bank) was incorporated in North Carolina and commenced business on September 8, 2004. The principal business activity of the Company is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties in North Carolina. The Bank is a state-chartered bank, and its        deposits are insured by the Federal Deposit Insurance Corporation (FDIC).         

On May 22, 2007, the shareholders of the Bank approved a plan of corporate reorganization under which the Bank became awholly-owned subsidiary of AB&T Financial Corporation (the Company), which was organized for that purpose by the Bank’s Board of Directors. The authorized common        stock of AB&T Financial Corporation is 10,000,000 shares with $1.00 par value and the original authorized preferred stock of AB&T Financial Corporation is 1,000,000 shares with no par value. Pursuant to the reorganization, the Company issued all shares of its common stock in exchange for all of the outstanding common shares of the Bank on May 14, 2008. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after        elimination of all significant intercompany balances and transactions.

**Note 3 - Recently Issued Accounting Pronouncements**

 

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.                 In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in        reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement (1) applies to all entities, (2) specifies certain election dates, (3) can be applied on an instrument-by-instrument basis with some exceptions, (4)        is irrevocable, and (5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect        adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for the Company on January 1, 2008. Earlier adoption is permitted in 2007 if the Bank also elects to apply the provisions of SFAS 157, “Fair Value Measurement.” The Bank is currently analyzing the fair value option provided under SFAS 159.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities        assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to        record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

 

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**AB&T FINANCIAL CORPORATION**

**Notes to****Consolidated****Financial Statements**

**(Unaudited)**

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before        this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The        amount of net income attributable to the noncontrolling interest will be included in consolidated netincome on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net        income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its        financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. It is intended to enhance the current        disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 is effective for the Company on January 1, 2009. This pronouncement does not impact accounting measurements but will result in additional disclosures if the Company is involved in material        derivative and hedging activities at that time.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”).  This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset.  This        FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140.  FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within        those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Company on January 1, 2009.  The Company is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,        “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and        interim periods within those fiscal years. Early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are        presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The        application of SFAS No. 162 will have no effect on the Company’s financial position, results of operations or cash flows.         

 

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**AB&T FINANCIAL CORPORATION**

**Notes to****Consolidated****Financial Statements**

**(Unaudited)**

 

 

FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”) was issued September 2008, effective for reporting periods        (annual or interim) ending after

November 15, 2008. FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives to disclose the nature of the credit derivative, the maximum potential amount of future payments, fair value of the derivative, and the nature of any recourse provisions. Disclosures must be made for entire hybrid instruments that have        embedded credit derivatives.

The staff position also amends FIN 45 to require disclosure of the current status of the payment/performance risk of the credit derivative guarantee. If an entity utilizes internal groupings as a basis for the risk, how the groupings are determined must be disclosed as well as how the risk is managed.                 The staff position encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption. After initial adoption, comparative disclosures are required only for subsequent periods.

FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required disclosures should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. The adoption of this Staff Position will have no material effect on the Company’s financial position, results of operations or cash        flows.

The SEC’s Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on fair value accounting. The press release includes guidance on the use of management’s internal assumptions and the use of “market” quotes. It        also reiterates the factors in SEC Staff Accounting Bulletin (“SAB”) Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value.

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements” (see Note 6) in a market that is not active and provides an        example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP is effective for the quarter ended September 30, 2008.

The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of September 30, 2008 and determined that it did not result in a change to its impairment estimation techniques.                 Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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**AB&T FINANCIAL CORPORATION**

**Notes to****Consolidated****Financial Statements**

**(Unaudited)**

**Note 4 - Comprehensive Income**         

Comprehensive income includes net income and other comprehensive income, which is defined as nonowner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the three andninemonth periods endedSeptember30, 2008 andSeptember30, 2007:         

|                                                        | Three months ended                    September 30, |   | Nine months ended                    September 30, |
|-------------------------------------------------------------|-----------------------------------------------------|--------|----------------------------------------------------|
|                                                        | 2008                                                |   | 2007                                               |   | 2008 |   | 2007 |
| Unrealized gains (losses) on securities available for sale  | $   71,896                                |   | $   39,140                               |   | $   24,356 |   | $   31,348 |
| Reclassification of (gains) losses recognized in net income | -                                                   |   | -                                                  |   | - |   | - |
| Income tax                                                  | (28,003)                                            |   | (15,245)                                           |   | (9,487) |   | (12,211) |
|                                                        |                                                |   |                                               |   |   |   |   |
| Other comprehensive income                                  | $   43,893                                |   | $   23,895                               |   | $   14,869 |   | $   19,137 |

**Note 5 – Income per share**         

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalentsusing the treasury        stock method.                                                                                                                                  **Three months ended September 30, 2008**

|                                                                                                                                                   | **Income                    (Numerator)** |  | **      Shares(Denominator)** |        | **Per****Share                    Amount** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|--|-------------------------------------------------------------|--------|--------------------------------------------|
| Basic earnings per share                                                                                                                               |                                      |  |                                                        |        |                                       |
|      Income (loss) available to common shareholders                                                                           | ($61,033)                                 |  |  2,678,205                                             |        | ($.02)                                     |
| Effect of dilutive securities                                                                                                                          |                                      |  |                                                        |        |                                       |
|      Stock options                                                                                                            | -                                         |  | -                                                           |   |                                       |
| Dilutive earnings per share                                                                                                                            |                                      |  |                                                        |        |                                       |
|      Income (loss) available to common shareholders                         plus assumed conversions | ($61,033)                                 |  | 2,678,205                                                   |        | ($.02)                                     |

**                                                                                                                           **

**                                                                                                            Three months ended September 30, 2007                                        **

|                                                                                                                                            | **Income                    (Numerator)** |   | **Shares                    (Denominator)** |  | **Per Share                    Amount** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|--------|---------------------------------------------|--|-----------------------------------------|
| Basic earnings per share                                                                                                                        |                                      |        |                                        |  |                                    |
|      Income available to common shareholders                                                  | $  213,777                           |        | 2,678,205                                   |  | $.08                                    |
| Effect of dilutive securities                                                                                                                   |                                      |        |                                        |  |                                    |
|      Stock options                                                                                                     | -                                         |   | -                                           |  |                                    |
| Dilutive earnings per share                                                                                                                     |                                      |        |                                        |  |                                    |
|      Income available to common shareholders                         plus assumed conversions | $  213,777                           |        | 2,678,205                                   |  | $.08                                    |

                                                                                             **     **

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**AB&T FINANCIAL CORPORATION**

 

**                Nine months ended September 30, 2008**

|                                                                                                                                            | **Income                    (Numerator)** |        | **Shares                    (Denominator)** |  | **Per****Share                    Amount** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|--------|---------------------------------------------|--|--------------------------------------------|
| Basic earnings per share                                                                                                                        |                                      |        |                                        |  |                                       |
|      Income available to common shareholders                                                  | $  125,538                           |        | 2,678,205                                   |  | $.05                                       |
| Effect of dilutive securities                                                                                                                   |                                      |        |                                        |  |                                       |
|      Stock options                                                                                                     | -                                         |   | -                                           |  |                                       |
| Dilutive earnings per share                                                                                                                     |                                      |        |                                        |  |                                       |
|      Income available to common shareholders                         plus assumed conversions | $  125,538                           |        | 2,678,205                                   |  | $.05                                       |

 

**                                                                                                             Nine months ended September 30, 2007                                        **

|                                                                                                                                            | **Income                    (Numerator)** |  | **Shares                    (Denominator)** |  | **Per****Share                    Amount** |        |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|--|---------------------------------------------|--|--------------------------------------------|--------|
| Basic earnings per share                                                                                                                        |                                      |  |                                        |  |                                       |        |
|      Income available to common shareholders                                                  | $  653,514                           |  | 2,526,146                                   |  | $.26                                       |   |
| Effect of dilutive securities                                                                                                                   |                                      |  |                                        |  |                                       |        |
|      Stock options                                                                                                     | -                                         |  | -                                           |  |                                       |        |
| Dilutive earnings per share                                                                                                                     |                                      |  |                                        |  |                                       |        |
|      Income available to common shareholders                         plus assumed conversions | $  653,514                           |  | 2,526,146                                   |  | $.26                                       |   |

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******AB&T FINANCIAL CORPORATION**

**Notes to****Consolidated****Financial Statements**

**(Unaudited)**

**Note****6****- Fair Value Measurements**

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet        in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).                 SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard        describes three levels of inputs that may be used to measure fair value:

| **Level 1** | Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, other securities that are highly                    liquid and are actively traded in over-the-counter marketsand money market funds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Level 2** | Observable inputs other thanlevel 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.                    Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bond, corporate debt securities,and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.                    This category generally includes certain derivative contracts and impaired loans. |
| **Level 3** | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the                    determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.                                                                                                                                               |

Available-for-sale investment securities ($3,656,759atSeptember30, 2008) are the only assets whose fair values are measured on a recurring basis using level 2 inputs. The Company has no        assets or liabilities whose fair values are measured on a recurring basis using level 1 or level 3 inputs. The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.                 The Company is predominantly an asset-based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carryingamount of impaired loans at September 30, 2008 was        $3,145,607.         FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis.                 The Company has no assets or liabilities whose fair values are measured using level 3 inputs.

 

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**AB&T FINANCIAL CORPORATION**

**I****tem 2 - Management's Discussion and Analysis****of Financial Condition and Results of Operations**

The following is a discussion of the Company’s financial condition as ofSeptember30, 2008 compared to December 31, 2007, and the results of operations for the three andninemonth periods endedSeptember30, 2008 and 2007. This discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes appearing in this report and in conjunction with the financial statements and related notes and disclosures in the Company’s 2007 Annual Report to        Shareholders. This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company’s management. The words “expect,” “estimate,”        “anticipate,” "plan," and “believe,” as well as similar expressions, are intended to identify forward-looking statements. The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Federal Deposit Insurance Corporation through May        22, 2008. All filings after May 22, 2008 have been through the Securities and Exchange Commission.         

**Results of Operations**

**Net Interest Income**

For the three months endedSeptember30, 2008, net interest income was $1,191,290as compared to        $1,303,298for the same period in 2007. The average rate paid on interest-bearing liabilities for the three months endedSeptember30, 2008 and 2007 was3.24% and4.73%, respectively. The average rate realized on interest-earning        assets was5.84% and8.34%for the three months endedSeptember30, 2008 and 2007, respectively.         

The net interest spread was2.60% and3.61%for the three month period endedSeptember30, 2008 and 2007, respectively.                 For theninemonths endedSeptember30, 2008, net interest income was $3,475,273as compared to $3,611,518for the same period in 2007. The average        rate paid on interest-bearing liabilities for theninemonths endedSeptember30, 2008 and 2007 was3.34% and5.06%, respectively. The average rate realized on interest-earning        assets was6.17% and8.34%for theninemonths endedSeptember30, 2008 and 2007,        respectively.                 The net interest spread was2.83% and3.28%for theninemonth period endedSeptember30, 2008 and 2007, respectively.         

**Provision and Allowance for Loan Losses**

The provision for loan losses is the charge to operating earnings that in management’s judgment is necessary to maintain the allowance for loan losses at an adequate level in relation to the risk of future losses inherent in the loan portfolio. For thethree month periods endedSeptember30, 2008 and 2007 the provision was $330,629and $204,201, respectively. For theninemonth periods endedSeptember30, 2008        and 2007 the provision was $652,870and $420,690, respectively. It is the position of management that based upon the current economic environment in which the Company is operating, that it is prudent to take an aggressive approach to identifying any potential credit related issues and setting aside additional reserves in a proactive manner. Management feels that the reserve is appropriate to the risks held within the portfolio.        OnSeptember30, 2008, there were $1,594,204in loans in nonaccrual status. OnSeptember30, 2007, there were $821,179in loans in nonaccrual status. Based on present information,        management believes the allowance for loan losses is adequate atSeptember30, 2008 and 2007 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses is1.16% and1.26%of total loans        atSeptember30, 2008 and 2007, respectively. There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the        future value of the collateral. The Company maintains an allowance for loan losses based on, among other things, historical experience, including management’s experience at other institutions, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which it believes to be reasonable, but which may not prove to be        accurate. Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease of the Company’s net income and, possibly, its capital.         

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**AB&T FINANCIAL CORPORATION**

**Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations**–*continued*

**Noninterest Income**

Total noninterest income for the three months endedSeptember30, 2008 was $21,777or49%lessthan total noninterest income for the same period last year. The largest component of noninterest income for the three month period endedSeptember30, 2008 was service charges on deposit accounts, which totaled $66,422or78% higher than those for the three month period endedSeptember30, 2007. This increase was driven largely by the Company’s expanded efforts in the acquisition of retail demand deposit accounts.There was no rental income for the three months ended September 30, 2008 and        2007.Loss on the sale of other real estate was $61,984 for the three months ended September 30, 2008 as opposed to zero gain or loss on the sale of other real estate for the same period last year.         Total noninterest income for theninemonths endedSeptember30, 2008 was $158,972or19% less than total noninterest income for the        same period last year. The largest component of noninterest income for theninemonth period endedSeptember30, 2008 was service charges on deposit accounts, which totaled $183,029or77% higher than those for theninemonth period endedSeptember30, 2007. Residential mortgage application fees were $3,395and other service charges, commissions and fees were        $65,116for theninemonth period endedSeptember30, 2008. The Company also had a net loss of $94,968on the sale of other real estate as ofSeptember30, 2008 and a net gain of $40,242on the sale of other real estate for the same period last year.         

**Noninterest Expense**

Total noninterest expense for the three months endedSeptember30, 2008 was $979,872or24% higher than total noninterest expense for the        same period last year. The primary component of noninterest expense is salaries and benefits, which were $556,980and $479,785for the three months endedSeptember30, 2008 and 2007, respectively. Salaries and benefits increased due to the increase in the number of active employees        and the additional expense of accrued bonuses and other benefits. Other operatingexpenses were $315,147and $226,730for the three months endedSeptember30, 2008 and 2007, respectively.                 Total noninterest expense for theninemonths endedSeptember30, 2008 was $2,771,467or20% higher than total noninterest expense for the same period last year. The primary        component of noninterest expense is salaries and benefits, which were $1,652,904and $1,438,066for theninemonths endedSeptember30, 2008 and 2007, respectively. Other        operating expenses were $821,454and $647,329for theninemonths endedSeptember30, 2008 and 2007, respectively.

**Income Taxes**

For the three months endedSeptember30, 2008 and 2007, the effective income tax rate was37.36% and39.26%, respectively. The income        taxbenefitwas$36,401for the three months endedSeptember30, 2008 compared to an income tax provision of $138,170for the        three months endedSeptember30, 2007.                 For theninemonths endedSeptember30, 2008 and 2007, the effective income tax rate was40.19% and39.30%, respectively. The income tax provision was $84,370for theninemonths endedSeptember30, 2008 compared to an income tax provision of $423,122for theninemonths endedSeptember30, 2007.         

**Net Income**         

The combination of the above factors resulted in netlossof$61,033for thethreemonths endedSeptember30, 2008 compared to net income of $213,777for the comparable period in 2007, a decrease of129%.                 Net income was $125,538for theninemonths endedSeptember30, 2008 compared to net income of $653,514for the comparable period in 2007.

**Assets and Liabilities**         

During the firstninemonths of 2008, total assets increased $26,839,318or18.23% when compared to December 31, 2007. The primary growth        in assets was an increase in loans receivable of $22,670,087or18.97% when compared to December 31, 2007. The funding for the growth came from a $15,219,923increase in deposits and a $10,570,000increase in advances from the Federal Home Loan Bank. The growth was a result of the        Company’s efforts to establish its presence in its marketplace and continued expansion of its customer base.         

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**AB&T FINANCIAL CORPORATION**

**Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations**–*continued*

**Investment Securities**

Investment securities totaled $5,028,039as ofSeptember30, 2008 as compared to $4,807,187at December 31, 2007. Of this amount,        $3,656,759were designated as available-for-sale. The other investments were nonmarketable equity securities consisting of $1,326,100in Federal Home Loan Bank stock and a $45,180investment in Community Bankers Bank stock.         

**Loans**

We experienced loan growth during the first nine months of 2008 as we worked to establish our presence in our marketplace. Loans increased $22,670,087, or 18.97%, during the period. As shown below, the largest increase was in real estate – mortgage loans which increased $16,089,000 or 21.24%, to $91,838,000 at September 30, 2008. Real estate - construction loans increased $4,248,000, or 16.09%, to $30,653,000. Commercial and industrial loans increased $2,452,000        or 15.10% to $18,694,000 at September 30, 2008. Consumer and other loans decreased $118,000 or 10.47%, to $1,008,513. Balances within the major loans receivable categories as of September 30, 2008 and December 31, 2007 are as follows:

|                             |  | September 30,                    2008 |             | December 31,                    2007 |        |
|----------------------------------|--|---------------------------------------|-------------|--------------------------------------|--------|
| Real estate – construction |  | $                                     | 30,653,000  |                                      | $      | 26,405,000 |  |
| Real estate – mortgage     |  |                                       | 91,838,000  |                                      |        | 75,749,000 |  |
| Commercial and industrial        |  |                                       | 18,694,000  |                                      |        | 16,242,000 |  |
| Consumer and other               |  |                                  | 1,008,513   |                                      |   | 1,127,426 |  |
| Total gross loans                |  | $                                     | 142,193,513 |                                      | $      | 119,523,426 |  |

**Risk Elements in the Loan Portfolio**         

Criticized loans are loans that have potential weaknesses that deserve close attention and which could, if uncorrected, result in deterioration of the prospects for repayment or the Company’s credit position at a future date. Classified loans are loans that areinadequately protected by        the sound worth and paying capacity of the borrower or any collateral and as to which there is a distinct possibility or probability that we will sustain a loss if the deficiencies are not corrected. At September 30, 2008 and December 31, 2007, the Company had criticized loans totaling $1,480,100 and $2,020,720, respectively. At September 30, 2008 and December 31, 2007, the Company had classified loans totaling $5,335,136 and $1,473,793, respectively. At September 30, 2008,the Company had $1,594,204or1.12% of total gross loans in nonaccrual status.                 The following table depicts the activity in the allowance for loan losses for theninemonths endedSeptember30, 2008 and 2007:         

|                                                |  | **September****30,                    2008** |             | **September****30,                    2007** |        |
|-----------------------------------------------------|--|----------------------------------------------|-------------|----------------------------------------------|--------|
| Balance, January 1                                  |  | $                                            | 1,370,235   |                                              | $      | 1,190,460 |  |
| Provision for loan losses for the period            |  |                                              | 652,870     |                                              |        | 420,690 |  |
| Net loans (charged-off) recovered during the period |  |                                         | (376,599    | )                                            |   | (195,046 | ) |
| Balance, September 30                               |  | $                                            | 1,646,506   |                                              | $      | 1,416,104 |  |
| Gross loans outstanding, September 30               |  | $                                            | 142,193,513 |                                              | $      | 112,357,315 |  |
| Allowance for loan losses to loans outstanding      |  |                                              | 1.16%       |                                         |        | 1.26% |   |

 

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**AB&T FINANCIAL CORPORATION**

**Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations**–*continued*

**Deposits**         

Total deposits increased$15,219,923or14.66%, from December 31, 2007 to $119,005,406atSeptember30, 2008. The largest increase was in time deposits $100,000and over, which increased $25,385,639or53%, to $73,278,588atSeptember30, 2008. This increase in time deposits $100,000and over is a combination of the Company's increased marketing efforts in the local market for deposits as well as the utilization of brokered certificates of deposits as funding sources. Brokered deposits represent a source of fixed rate funds priced competitively with        Federal Home Loan Bank (“FHLB”) but do not require collateralization like FHLB borrowings. Expressed in percentages, noninterest-bearing deposits increased90.97% and interest-bearing deposits increased12.15%.                 Balances within the major deposit categories as ofSeptember30, 2008 and December 31, 2007 are as follows:         

|                                         |  | **September 30,                    2008**                               | **December 31,                    2007**                                 |        |
|----------------------------------------------|--|-------------------------------------------------------------------------|--------------------------------------------------------------------------|--------|
| Noninterest-bearing transaction accounts     |  | $           6,326,934 | $            3,312,975 |        |
| Interest-bearing transaction accounts        |  | 3,937,059                                                               | 3,308,771                                                                |        |
| Savings and money market                     |  | 24,588,781                                                              | 36,060,632                                                               |        |
| Time deposits $100,000 and over              |  |                                                                         | 73,278,588                                                               |        | 47,892,949 |  |
| Other time deposits                          |  |                                                                    | 10,874,044                                                               |   | 13,210,156 |  |
|      Total deposits |  | **$**                                                                   | **      119,005,406**                           | **$**  | **     103,785,483** |  |

 

 

 

 

 

 

 

 

**Advances from Federal Home Loan Bank**         

During the third quarter 2008, the Bank borrowed $7,570,000 from the Federal Home Loan Bank of Atlanta (FHLB) in order to fund loans and general liquidity purposes.  The $4,570,000 FHLB advance will mature July 28, 2009 and the $3,000,000 FHLB advance will mature August 28, 2009.  The advances have fixed interest        rates of 3.04% and 3.02%, respectively.

**Liquidity**

Liquidity needs are met by the Company through cash and short-term investments, and scheduled maturities of loans on the asset side and through pricing policies on the liability side for interest-bearing deposit accounts. The Company also has the capacity to pledge certain loans as collateral for additional borrowings from FHLB during times when        the comparable interest rate is favorable to the interest rate on deposit products. As ofSeptember30, 2008, the Company’s primary sources of liquidity included federal fundssoldtotaling$16,891,359and securities available-for-sale totaling $3,656,759and advances from the Federal Home Loan Bank of $23,570,000. Of the $23,570,000in FHLB advances, $10,570,000will mature within a year, $5,000,000will mature over one year and        $8,000,000will mature afterthreeyears. Lines of credit available through correspondent banks to purchase federal funds totaled $15,400,000atSeptember30, 2008.         

In response to financial conditions affecting the banking system and financial markets and the potential threats to the solvency of investment banks and other financial institutions, the United States government has taken unprecedented actions. On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008        (the “EESA”). Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase mortgages, mortgage-backed securities, and other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced the Capital Purchase Program under the EESA, pursuant to which the Treasury intends to make senior preferred stock        investments in participating financial institutions that will qualify asTier I capital. Based on our risk-weighted assets as of September 30, 2008, we may be eligible to issue up to $4.2 million in newsenior preferred stock under the program. We are evaluating whether to participate in the Capital Purchase Program. Regardless of our participation, governmental intervention and new        regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

**Capital Resources**

Total shareholders' equity increased $246,211to $24,719,933atSeptember30, 2008. This is the result of net income for the period of        $125,538, an unrealizedgain, net of taxes, in securities available-for-sale of $14,869and stock based compensation of $105,804.         

 

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**AB&T FINANCIAL CORPORATION**

**Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations**–*continued*

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk-weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1        capital consists of common shareholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses subject tocertain limitations. An institution's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of itsTier 1 and Tier 2 capital.        The regulatory minimum requirements are 4% forTier1 and 8% for total risk-based capital.                 Banks and bank holding companies are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%; however all but the highest rated institutions are required to maintain ratios 100 to 200 basis point above the minimum. Both the company and the bank exceeded their minimum regulatory capital ratios as of September 30, 2008 as well as the ratios to be considered "well        capitalized."

The following table summarizes the Bank’s risk-based capital at September 30, 2008:     

| Shareholders' equity                                                   | $      24,719,933               |
|------------------------------------------------------------------------|----------------------------------------------------------|
| Plus – unrealized (gain) loss on available-for-sale securities   | (28,653)                                                 |
|  

Tier 1 capital                                                 |  

$      24,691,280       |
|  

Plus - allowance for loan losses(1)                            |  

1,646,506                                        |
|  

Total capital                                                  |  

$       26,337,786 |
|  

Risk-weighted assets                                           |  

$     141,369,000            |
|   Risk-based capital ratios:                                      |                                                          |   |
|      Tier 1 capital (to risk-weighted assets) |                                                          | 17.47 % |
|      Total capital (to risk-weighted assets)  |                                                          | 18.63 % |
|      Leverage ratio                           |                                                          | 15.16 % |

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Limited to 1.25% of risk-weighted assets

**Off-Balance Sheet Risk**

Through its operations, the Company has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Company’s customers at predetermined interest rates for a specified period of time. AtSeptember30, 2008, the Company had issued commitments to extend credit of $17,565,775through various types of commercial lending arrangements. All of these commitments to extend credit had variable rates.                 The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit atSeptember30, 2008.         

|                                     | **WithinOneMonth**                   |   | **After OneThroughThreeMonths** |   | **After ThreeThroughTwelveMonths** |   | **GreaterThanOne Year** |   |  

**Total** |
|------------------------------------------|--------------------------------------|--------|---------------------------------|--------|------------------------------------|--------|-------------------------|--------|-------------------|
| Unused commitments to extend credit      | $     5,761 |   | $   2,544,020         |   | $ 7,140,463                        |   | $ 7,795,836             |   | $ 17,486,080      |
| Standby letters of credit                | 79,695                               |   | -                               |   | -                                  |   | -                       |   | 79,695            |
| **     **Totals | $   85,456                 |   | $   2,544,020         |   | $ 7,140,463                        |   | $ 7,795,836             |   | $ 17,565,775      |

Based on historical experience, many of the commitments and letters of credit will expire unfunded. Accordingly, the amounts shown in the table above do not necessarily reflect the Company's need for funds in the periods shown.

 

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**AB&T FINANCIAL CORPORATION**

**Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations**–*continued*

The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable,        inventory, property, plant and equipment, commercial and residential real estate.

**Critical Accounting Policies**

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the financial statements at December 31, 2007 as        contained in our 2007 Annual Report to Shareholders. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the        nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations. We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our financial statements. Refer to the portions of the discussion in this report on Form 10-Q and in our 2007 Annual Report to Shareholders that address our allowance for loan losses for a description of our processesand methodology for determining our allowance for        loan losses.

 

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AB&T FINANCIAL CORPORATION

 

**Item 4T.  Controls and Procedures**

(a)     Based on their evaluation of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)) as of September 30, 2008, our chief executive officer and chief financial officer concluded that such controls and procedures were effective.

(b)     There was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of its evaluation, including any corrective actions with regard to significant deficiencies and material        weaknesses.

**PART****I****I -****OTHER****INFORMATION**

 

****Item 6. Exhibits****

| Exhibit                    Number | Description of Exhibit                                                                                     |
|-----------------------------------|------------------------------------------------------------------------------------------------------------|
| 31                                | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)                                    |
| 32                                | Certification pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

****

 

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**AB&T FINANCIAL CORPORATION**

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.                                                                                                                                                                                         

AB&T FINANCIALCORPORATION                                                                                                                  

                         (Registrant)                                        

 

 

                                                                                           

                                                              By:    /s/*Daniel C. Ayscue**                                                 *

Daniel C. Ayscue                                                                                      Interim President        and Chief Financial Officer

 

 

Date:   November 14, 2008